Description

It is unclear whether the country risk is diversifiable or not. Researchers are still debating on this issue. Damodaran’s choice is to include a Country Risk Premium (CRP) when estimating the Cost of Capital for markets other than US. In this way, the discount rate reflects different market conditions, political and financial stability of a given country.

Three main approaches can be used to estimate the CRP:
• Default risk spread: the CRP is set equal to the default spread on government bonds.
• Relative standard deviation: the CRP is based on the relative volatility of the market under analysis relative to the US market.
• A combination of the two above: the CRP is set equal to the default spread adjusted for the relative volatility of stocks and bond prices.

Plot info

This is an interactive plot. Select a country with the cursor and a set of information will be shown. Zoom in and out using the buttons on the top-right corner. Select an area of the map to highlight only the countries of interest.

The CRP computation is based on the default spread adjusted for the relative volatility (1.2342). The BAML Emerging Mkt Public Bond Spread and the S&P Emerging BMI (Equity Index) have been used as proxies of the bond market and the equity market, respectively. The Total ERP is the sum of CRP and a proxy of the current risk premium for a mature equity market (6.01%). The default spread has been computed using both Moody’s rating and Credit Default Swaps. The two approaches yield different estimates. Choose the set of data using the buttons in the top-left corner. The CDS rate is the sovereign spread over US.

Note: all the data below can be used to compute the dollar cost of equity. To convert this dollar cost of equity into a cost of equity in the local currency, all you need to do is to scale the estimate by relative inflation (risk free rate conversion kind approach).

Summary table

The table below displays all the data available in the plot above. You might be looking for a single data, here you can find all the relevant information for each country. The countries are in alphabetical order, use the sidebar to scroll down. Using the following link you can access an interactive pivot-table useful to run a graphical analysis or to filter data.

Where does all the data come from? Check our source